Economic Indicators

U.S. Economy: A Long and Winding Road

Strong U.S. economic expansion in 2021; growth will moderate in 2022

A new report from AM Best reveals that persistent inflation and lingering COVID concerns are significant risks to US economy in 2022. To access the full report visit here.

OLDWICK, N.J., February 23, 2022—Supported by government spending and extraordinary accommodative monetary policy, the U.S. economy grew by 5.5% year over year in 2021, the largest economic expansion in decades. However, according to an AM Best special report, there are several headwinds at the beginning of 2022 for the U.S. economy that include the potential for a Federal Reserve monetary policy misstep, geopolitical tensions, and persistently high inflation.

A new Best’s Special Report, titled, “U.S. Economy: A Long and Winding Road,” notes that the strong economic growth resulted in the creation of over six million jobs in 2021. However, this strong growth was accompanied by the highest level of inflation in decades, with headline inflation registering 7.1% in December. As a result, toward the end of 2021, expectations for a reduction in accommodative policy shifted forward notably. A steadily improving labor market and persistently high inflation have caused the Fed to pivot and commence tightening measures sooner than it initially expected.

“The Fed will need to walk a tightrope as it tries to tame inflation, without grinding economic growth to a halt,” said Ann Modica, associate director, AM Best credit rating criteria, research and analytics. “A misstep would be a very significant—if not the biggest—risk for the U.S. economy. If the Fed is behind the curve in raising rates, it runs the risk of anchoring inflationary pressures, and it then may be forced to act aggressively to tighten credit. On the other hand, tightening too much and too quickly would have negative implications for the ongoing economic recovery.”

Inflation: Not All Pricing Pressures Are Created Equal

The transitory nature of inflation is playing out more slowly than originally expected. Prices began rising in the second quarter of 2021 and continued to rise through the rest of the year. Low prior-year base effects, high commodity prices, supply chain issues, and an uptick in labor prices have all played a role in the increase. For 2021, headline inflation averaged 4.7%, with core inflation, which excludes volatile food and energy prices, averaging 3.6%. However, there was a pronounced acceleration in prices towards the second half of the year. In December 2021, headline inflation rose by 7.1% and core inflation, by 5.5%, year over year.

The trend continued in January 2022, with headline inflation reaching 7.5% and core inflation, 6.0%. Some of the inflationary pressures arose due to the pandemic and the manner in which the virus is spread. Consumers were hesitant to engage in high-contact activities such as eating out in restaurants or going to concerts, causing prices on services-based activities to stagnate. Consumers switched their spending preferences to goods, which caused goods’ price inflation to rise at a much faster pace than that of services in 2021. Over the past 30 years, goods price inflation rose by 0.3% a year while services price inflation rose by 2.6% a year, on average.

The Fed will need to walk a tightrope as it tries to tame inflation, without grinding economic growth to a halt...

Furthermore, price increases during most of the year seemed largely contained to the sectors most sensitive to pandemic-related disruptions, such as vehicles (owing to supply bottlenecks for semiconductors). Some of these issues are likely to remain in play in 2022 as well, although pricing pressure should moderate somewhat towards the middle to end of 2022.

However, recent data releases have shown that inflationary pressures are broadening into other categories, which is more concerning. Rent inflation, which is a lagging indicator, has accelerated in response to surging home prices and low vacancies. The Bureau of Labor Statics (BLS) does not use housing price appreciation to measure inflation, as it views housing as capital goods and not consumption items. The BLS measures the change in home prices using rent of primary residence and owners’ equivalent rent of primary residence. Home price increases tend to be stickier. Short-term inflation expectations remain elevated and above long-term inflation expectations, which remain broadly anchored at just above 2.0%.

Housing Market Remains Strong but Will Moderate in 2022

The housing market enjoyed another strong year in 2021 aided by low mortgage rates, a continued shift in the demand for housing (brought about by greater numbers of people working remotely), and millennials entering the housing market in record numbers—in 2021, these buyers accounted for more than half of all home-purchase loan applications. New homebuyers resulted in heightened competition for the limited supply of homes for sale, and home prices grew at a record pace. According to the National Association of Realtors, pricing appreciation for both new and existing homes increased over 14% year over year.

Inventory for homes remained lean, declining to an all-time low of 910,000 units in December. However, more housing units entered the pipeline: Housing starts averaged nearly 1.6 million units a month in 2021, the highest since the financial crisis. Despite low inventory, home prices have started to moderate, as buyers pursue more affordable housing markets. Regional housing price differentials have led to population shifts since the start of the pandemic, highlighting the incentive for potential homebuyers to move to states where housing is relatively less expensive. According to the latest population estimates, New York and California have lost approximately 850,000 residents to other states since April 2020, while Texas and Florida gained 475,000.

Numerous headwinds cloud the 2022 outlook for the housing market, including a continued lack of inventory (particularly for affordable housing), record-high home prices, rising prices for building materials, and an increase in mortgage rates. Housing affordability basically boils down to three factors: home price, mortgage rates, and personal incomes. Affordability, particularly in an environment of rising mortgage rates and record high home prices, will be in the spotlight. The housing sector will still likely experience pricing appreciation in the single digits, despite the more challenging environment.




AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit